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Court Decision Denigrates Marriage - Or Does it?

In my professional work I came across this odd little court decision. The circumstances behind the case are a caution to those who don't believe in the concept of "unintended consequences". Basically, recent pension reform (well, a 2006 law which is finally being implemented fully now) requires that a plan that is woefully underfunded shall be no longer allowed to pay out benefits in a form that are "accelerated", such as a single lump sum of the present value of the future lifetime obligation. That's a reasonable rule - it means that a plan that might not be able to meet all of its obligations right now will have more time to recover and, maybe, will be able to get back to full funding. There has also been in place, for a long time, a pension law which provides that if an employee is married, the benefit he is accruing is really a benefit for him and his spouse, so the benefit is automatically payable as a "joint and survivor" benefit: payable upon retirement to both spouses and then at the first death payable to the survivor. (They can elect to receive only a single life pension instead - in a higher amount - only with the signature of both spouses). In the circumstances of a divorce, the non-employee ex-spouse has a right to some pension benefits, but she (typically the non-employee spouse is the wife, so I will phrase it that way even though it applies equally well to a reverse situation) doesn't want to leave the timing of when she gets that benefit to depend on her employee husband's decision to retire and start payments, or to delay that. So the law allows the plan to provide, if specified under the qualified divorce arrangement (a QDRO, Qualified Domestic Relations Order), that the wife can get her benefits out now in full, so it is no longer tied to her rat of an ex-husband.

Now enter in the Continental pilots, who are on the look out for good ol' numero uno. The plan sends them a (required) notice saying funding level is below the threshold, they will have to curtail lump sum payments. What do they do? They divorce their wives, and set up QDROs that assign their entire pension rights to the ex-wives, and that provide the ex-wives are to be paid their retirement benefit immediately, in full. The ex-wives gets the money and roll it into their IRAs so no taxes are due. Then the couples re-marry !!!

What could be simpler? The pension plan is on shaky ground, may be in danger of folding or at least in danger of having to pay out reduced benefits, so they made sure they got theirs. Hey, the airline industry is pretty wobbly, there is no guarantee that Continental will ever recover well enough to properly fund the plan. Get yours while the getting is good, is their motto.

Not surprisingly, the pension plan (and its sponsor Continental airline) didn't like that. The whole operation clearly defeats the very purpose of the no-accelerated-benefits law. Paying out the lump sums all together exacerbated the funding problem. And the divorces were shams - many of them didn't even move out of the house. After the retirement plan paid the benefits, they submitted a claim to recover the amounts paid. The plan sued in federal court to get the money back into the plan. The court declined to support the pension plan's argument.

My initial feeling was one of outrage at the pilots, and anger at the court. It is totally obvious that the pilots were using a merely pro-forma legal mechanism, without any underlying substance, to effectively skirt the law and its entirely reasonable intent. Effectively, the court is allowing the pilots to make a total mockery of marriage.

But then I came to the last bit: the footnote on the last page, which I will quote for you:

We emphasize that this holding is a narrow one, and our decision should not be construed to prevent a retirement plan administrator from recouping benefits paid out if a
divorce is declared a sham (or a DRO is otherwise invalidated) by a court or agency of
competent jurisdiction, and thus the doctrine of res judicata precludes further litigation in an
ERISA proceeding on the question of good faith. That scenario is not before this panel.

The judges were, in effect, telling Continental and its pension plan: you filed in the wrong court for the wrong type of remedy, stupid. Go and file in state court to have the QDROs nullified, and you will have what you need. This ruling is narrow, so you have all the maneuvering room you need to do that. If I am reading their remonstrance to the plaintiffs correctly, the judges are virtually begging them to fix the matter by filing in state court instead. So, instead of having a court that is allowing marriage to be trampled underfoot, the court is doing 2 things: properly exercising restraint by identifying the limits to their own authority to allow a pension plan to write their own fixes to legal mess-ups, and explaining how such fixes can be achieved WITHOUT re-writing the law from the bench. How's that for good behavior from the bench? Or am I mistaken and misreading the whole thing?

Comments (14)

Tony, are you familiar with the type of situation where a man (who has assets) divorces his wife who is in a nursing home so that she can be declared to have no assets and get Medicare to pay for her nursing home care? Do you know if such divorces have ever been declared shams by a state court?

Good call by the 5th Circuit. I haven't read the opinion, but your summary makes it seem like the right decision. It's not New Orleans' fault that no-fault divorce laws let this kind of thing go on.

thus the doctrine of res judicata precludes further litigation in an ERISA proceeding on the question of good faith.

Res judicata is the legal principle that prohibits re-litigation of a legal question that has already been decided between the parties. I am not, frankly, sure what point the court is making about res judicata here (I haven't read the opinion): that sentence is a bit wobbly. I think the court is saying that there is no opportunity to litigate the question of good faith in the federal proceeding (although if res judicata bars it there, it's not clear why it won't bar it also in a state court).

Marriage, status of marriage, etc., is a state law matter. I have also not read the opinion, but based on Tony's summary, the court was saying, quite properly, the issue of whether or not they were properly divorced is not an issue a Federal Court is qualified to determine - it is a state law matter and as to that matter - the competent court has spoken. Res Judicata. The thing is decided. But there is nothing to prevent the pension fund from challenging the validity of the DRO in the state court that issued it. If that court voids the DRO, then the pension fund can come back to the ERISA process to recover the funds. The State court having voided the DRO, it is a straightforward process, because the proper court will have determined that no proper divorce took place. Res judicata.

The next story, though, is the one that truly unleashes our sinful schadenfruede: Pilot and wife divorce, wife gets payout of 100% of pension fund, then, remembering her long-suffered, and well-founded, fears of infidelities in foreign cities with various flight attendants, moves out. With the money.

This is the sort of thing that happens as marriage is increasingly moved out of the realm of the sacred in people's minds. That sacred status is the only thing that has limited the amount of gaming of the system in the past. I wrote about this about a year ago on my blog, with a take on how the institution of marriage gets trampled when Rational Economic Man comes on the scene.

Titus is absolutely right, the sentence is wobbly, and really is not coherent. Although I agree with John S. that the Circuit Court is rightly pointing to the state as the proper venue for the marriage status, I took the court to be saying, in effect, that the federal court was NOT issuing a determination about the status of the marriage, the federal determination was narrowly given to leave room to take up the matter of the marriage in the proper jurisdiction. As a result, the court is saying that res judicata IS NOT in play here (yet) as to whether the divorce is a sham or not. The "and thus" in the last clause of the sentence

and thus the doctrine of res judicata precludes further litigation in an ERISA proceeding on the question of good faith.

must refer back to the only thing that has explanatory power earlier, and that is the declaration that

our decision should not be construed to prevent a retirement plan administrator from recouping benefits paid out if a divorce is declared a sham (or a DRO is otherwise invalidated) by a court or agency of competent jurisdiction

If they want this decision to be construed as to leave room for a plan to get the divorce declared a sham, then it must be that the sham status of the divorce is not already adjudicated. The final sentence makes this a little clearer: "That scenario is not before this panel." This court is NOT treating the matter of whether the divorce is a sham, so the matter is not being put paid under res judicata.

Tony, are you familiar with the type of situation where a man (who has assets) divorces his wife who is in a nursing home so that she can be declared to have no assets and get Medicare to pay for her nursing home care? Do you know if such divorces have ever been declared shams by a state court?

I am familiar with the basic premise in the Medicaid law: you have to use up your assets before the state will take over the nursing home costs. They have some standards about what does not get included, the most obvious being: you don't have to sell the house that the other (non-nursing home) spouse remains living in. (At least that's true in my state. It's possible other states have other rules.) That would be pointless. Another rule is that you cannot give away all your assets to your kids, and THEN enter the nursing home and ask for Medicaid support - the state can look at gifts up to 5 years in the past and recapture the value (or deny benefits until the gift was 5 years in the past).

For the divorce idea, I am not sure what the point is: if the assets are marital property, equally owned, then the divorce agreement presumably should have split them 50-50 so that the nursing-home spouse still has assets around. If the assets are really NOT marital property (say, the man had the assets before marriage) then I wouldn't think Medicaid can go after them anyway. Though I am not sure. In any case, I would think that the same state that controls the Medicaid program and has the capacity to look at gifts made up to 5 years in the past can also look at the state court decisions about property allocation in divorce and unravel something that the state thinks smells rotten. But if there is real non-Medicaid basis (acceptable in state marital law) to split the assets other than 50-50, then that real basis is sufficient to overcome the Medicaid search-N-grab rules and really serve as an effective way to prepare for Medicaid eligibility.

How about the fact that they “essentially conducted themselves as if the divorce had never happened” ?

The fact that a state's laws about divorce are stupid and nonsensical doesn't mean that a divorce cannot be a sham. It might just mean that the state's laws permit sham divorces, I guess. But in reality most states permit divorce only for a reason, even if that reason is merely given as "incompatibility", or something equally vague. Such a reason presumably can be supported with evidence, and therefore potentially can be defeated with evidence as well. Such as "they conducted themselves as if the divorce had never happened."

I guess my main objection to the shenanigans present in this case is the mockery the pilots are making of marriage by pretending to be divorced, for a purely monetary reason, and then getting remarried, as if marriage were not even a matter of a REAL contract that actually means something (much less a covenant with God and man), but just some words on paper that you can edit whenever you feel like paying a lawyer to edit them, words that imply nothing whatsoever as to real meaning. If that sort of stuff goes on a lot, then the states have managed to eviscerate the marriage contract altogether and there really is no point to having marriage be a state-recognized status. I would rather the state get out of the market of recognizing marriage altogether, than have the state nullify the very meaning of marital commitment (or any kind of commitment, I guess).

Good point about dividing his assets in the divorce. Maybe the husband does find some way not to divide the assets 50-50. Or maybe the idea is that this way at least the nursing home gets only 50% of the 401k before she goes to Medicaid, whereas otherwise the whole thing would have to be emptied before Medicaid would pay?

But in reality most states permit divorce only for a reason, even if that reason is merely given as "incompatibility", or something equally vague. Such a reason presumably can be supported with evidence, and therefore potentially can be defeated with evidence as well. Such as "they conducted themselves as if the divorce had never happened."

What civic or criminal consequences would accrue if a particular couple's divorce was deemed a "sham" by an appropriate authority? (And which the heck authority would that be, anyway, and how would they prove it?)

Stephen, let's suppose that a divorce was granted on grounds of "incompatibility." Then along comes Continental and sues in court to nullify the divorce, giving proof that the couple never took any actions that indicate incompatibility. The same state court that approves the divorce presumably has venue to nullify it (though it may have to go to a higher level perhaps). If the plaintiff wins the case, the court would end up declaring that the divorce was never valid. Check out this site for some examples.

Criminal effects would be unlikely, unless there was sufficient evidence to prove fraud. For fraud, prison time and fines would be possible. Civil effects are rather more difficult to estimate: the IRS rules on filing status (income tax) and marital deductions (estate tax) hang on state determination of marital status. Adoption and custody results all depend on marital status, as do health benefits, retirement benefits, and a multitude of more minor arrangements. I could see one of the pilots losing the retirement battle, and then turning around and suing the company to get some catastrophic health costs for the (putative) wife covered when they hadn't been originally been covered. It would be interesting to see if any of the pilots had filed "single" during the critical time period. And then has the IRS after them, after the divorce is invalidated. Or filed married and has the IRS after them now.

My guess is that the state isn't inclined to touch the issue with a ten foot pole. See marriages and divorces, even non-'sham' ones are terribly messy. My mother and father were married for around 7 or 8 years, divorced without any real cause, decided they didn't want to live without each other, remarried, stayed married for several more years, and then divorced again and both married other people. No sham or fraud involved in that. Try distinguishing in a court of law between that perfectly 'legitimate' case and one of these. Doubt any prosecutors are terribly interested in doing so.

Doesn't matter whether a prosecutor is interested or not, if it is tried in civil court (we're not looking at criminal law here anyway). If Continental or whomever files suit, the civil court has to take the case long enough to at least hear out the initial claim. I agree with you that there is probably a pretty difficult hurdle to overcome to prove the divorce is a sham, but the link I gave above shows that state courts already do invalidate divorces, so it's not a totally new area of law or anything. There must be standards to go by, and there are probably precedents to apply as well. In this case, the district court itself seems to have been willing to characterize the situation as “essentially conducted themselves as if the divorce had never happened”. That's surely at least the beginning of a real case, even if it's not sufficient on its own. In civil court, depending on the context, the standard of proof is not "beyond a reasonable doubt" but rather "a preponderance of the evidence," so the plaintiffs may not need a totally perfect case anyway.

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